In Re: O'Brien Env ( 1999 )


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  •                                                                                                                            Opinions of the United
    1999 Decisions                                                                                                             States Court of Appeals
    for the Third Circuit
    7-19-1999
    In Re: O'Brien Env
    Precedential or Non-Precedential:
    Docket 98-6151
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    Recommended Citation
    "In Re: O'Brien Env" (1999). 1999 Decisions. Paper 208.
    http://digitalcommons.law.villanova.edu/thirdcircuit_1999/208
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    Filed July 19, 1999
    UNITED STATES COURT OF APPEALS
    FOR THE THIRD CIRCUIT
    No. 98-6151
    IN RE: O'BRIEN ENVIRONMENTAL ENERGY, INC.,
    Debtor
    CALPINE CORPORATION,
    Appellant
    v.
    O'BRIEN ENVIRONMENTAL ENERGY, INC.,
    now known as NRG GENERATING (U.S.), INC.
    On Appeal from the United States District Court
    for the District of New Jersey
    (D. C. No. 97-cv-01554)
    District Judge: Honorable Joseph A. Greenaway, Jr.
    Argued April 7, 1999
    Before: SLOVITER, ALITO and ALARCON,*
    Circuit Judges
    (Filed: July 19, 1999)
    Michael R. Griffinger (Argued)
    Gibbons, Del Deo, Dolan,
    Griffinger & Vecchione
    Newark, N.J. 07102
    _________________________________________________________________
    * Honorable Arthur L. Alarcon, Senior Circuit Judge, United States Court
    of Appeals for the Ninth Circuit, sitting by designation.
    James A. Scarpone
    Hellring, Lindeman, Goldstein
    & Siegal
    Newark, N.J. 07102
    Attorneys for Appellant
    Craig J. Donaldson
    Riker, Danzig, Scherer, Hyland
    & Perretti
    Morristown, N.J. 07962
    Jeff J. Friedman (Argued)
    Rosenman & Colin
    New York, N.Y. 10022
    Mitchell A. Karlan (Argued)
    Gibson, Dunn & Crutcher
    New York, N.Y. 10166
    Attorneys for Appellees
    OPINION OF THE COURT
    SLOVITER, Circuit Judge.
    Calpine Corporation appeals from the order of the
    District Court affirming the Bankruptcy Court's decision
    not to award it a break-up fee or expenses in connection
    with its unsuccessful bid to acquire O'Brien Environmental
    Energy, Inc. ("O'Brien"), the Debtor in a Chapter 11
    bankruptcy proceeding. The term "break-up fee" refers to a
    fee paid by a seller to a prospective purchaser in the event
    that a contemplated transaction is not consummated. This
    appears to be the first court of appeals decision to consider
    the standards that should govern an award of break-up
    fees and related expenses in the bankruptcy context.
    I.
    The facts of this case are largely undisputed. O'Brien at
    one time developed cogeneration, waste-heat recovery and
    biogas projects for the production of thermal and electrical
    energy. On September 28, 1994, it filed for Chapter 11
    2
    protection and began operating as a debtor-in-possession
    under 11 U.S.C. S 1107. John Kelly and Glass &
    Associates, a crisis management firm, provided O'Brien
    with interim management services.
    In February 1995, Kelly, Arthur Anderson, and counsel
    for O'Brien decided to proceed with a sale of all or almost
    all of O'Brien's assets rather than attempt to continue
    operating O'Brien as a going concern. Representatives of
    O'Brien contacted over 300 potential buyers, and
    approximately 125 expressed interest. The representatives
    then gathered publicly available information about O'Brien
    in "war rooms" in Philadelphia and New York. Potential
    buyers were given access to the rooms upon the signing of
    a confidentiality agreement.
    Roughly fifty potential buyers signed agreements and
    were given access. Approximately nineteen later formally
    expressed an interest in purchasing the company, and ten
    submitted bids. In May, seven were invited to improve their
    bids, finish due diligence, and complete term sheets. At
    least five submitted bids to the Debtor, the Equity
    Committee, and the Official Unsecured Creditors'
    Committee (the "Creditors' Committee") and made elaborate
    oral, written, and videotaped presentations. Of the
    submissions received, three were deemed highest and best:
    those of Calpine, NRG Energy, Inc. ("NRG"), and Destec
    Corp.
    On July 10, 1995, O'Brien entered into a binding and
    guaranteed purchase agreement with Calpine. The
    agreement provided for the sale of O'Brien's business and
    the transfer of $90 to $100 million of O'Brien's liability to
    Calpine. The agreement did not provide for any payment to
    O'Brien's existing shareholders and did not even provide for
    full payment to creditors. See App. at 311. Significantly for
    purposes of this appeal, Calpine's obligation to perform
    under the contract was conditioned on the parties' ability to
    secure the approval by the Bankruptcy Court of a break-up
    fee of $2 million and expenses up to approximately $2
    million to be paid to Calpine under certain circumstances.
    See App. at 185-89.
    O'Brien filed a motion in the Bankruptcy Court for such
    3
    approval on July 7, 1995. The Bankruptcy Court
    considered the motion at a hearing held on August 17,
    1995. The Debtor, the Creditor's Committee, O'Brien's
    secured creditors, and several unsecured creditors each
    supported the motion; the Equity Committee, Wexford
    Management LLC ("Wexford") (O'Brien's controlling
    shareholder), and NRG opposed it.1
    The Bankruptcy Court refused to approve the break-up
    fee and expense provisions, expressing concern that
    allowing such fees and expenses would "perhaps chill or at
    best certainly complicate the competitive bidding process."
    App. at 643. The court indicated that it would be willing to
    permit Calpine to seek a break-up fee and expenses at the
    end of the process, but Calpine replied that it would not go
    forward absent the buyer protection it had sought. The
    court adjourned the hearing until August 25, 1995. See
    App. at 643-45.
    Notwithstanding its position at the hearing, Calpine soon
    decided to reenter the bidding. On August 25, 1995, all the
    major parties agreed upon bidding procedures, and, on
    August 30, 1995, an order was entered by consent that,
    inter alia, approved a modified version of the Calpine
    contract. The order stated, in part, "Calpine's right to
    request approval from the Court of the allowance and
    payment of a Break-Up Fee and Break-Up Expenses is
    hereby reserved." App. at 694-95. The order further
    provided, "[S]hould the [Calpine Contract] be terminated
    pursuant to Section 14.1(g) thereof, or the Court confirm a
    Plan-based Bid other than Calpine's . . . , the Official
    Committee of Unsecured Creditors . . . , certain of the
    Debtor's secured creditors, . . . as well as Mr. John Kelly in
    _________________________________________________________________
    1. It is not entirely clear from the record whether it was Wexford or
    Kelly
    who was authorized to speak for the Debtor at the August 17, 1995
    hearing. The brief filed for Wexford, O'Brien's largest shareholder,
    contends it had control of the Board of Directors at that time. See
    Appellees Cogeneration Corp. and Wexford's Br. at 8. The issue was
    litigated, but the litigation resulted in a practical compromise rather
    than a ruling of law. In any event, our resolution of the issues raised by
    this appeal does not turn on a resolution of this controversy, and we
    refer to the position taken by John Kelly as that of the Debtor merely for
    convenience.
    4
    his capacity as the Debtor's Chief Administrative Officer,
    shall support the allowances and payment of such Break-
    up Fee and Break-up Expense." App. at 695.
    An auction followed during which Calpine and NRG
    competed, but NRG filed the last enhanced bid, which the
    court deemed to be the last, best offer. Prior to confirmation
    of NRG's plan, Calpine filed an Application for Payment of
    Fees and Expenses Pursuant to 11 U.S.C. S 503(b), seeking
    a $2 million break-up fee, $2,250,000 in break-up
    expenses, and interest at the prime rate from January 15,
    1996 through payment of the fee and expenses. NRG,
    Wexford, and the Equity Committee objected to Calpine's
    application; the Creditors' Committee, which had been
    Calpine's supporter from the outset, supported it.
    At a hearing held on June 6, 1996, the Bankruptcy Court
    overruled objections to Calpine's right to present an
    application seeking fees, and on August 28, 1996, it held
    an evidentiary hearing on Calpine's application. On
    November 8, 1996, the Bankruptcy Court filed a
    comprehensive opinion denying Calpine's application and
    entered the Order on November 27, 1996.
    Calpine appealed to the United States District Court for
    the District of New Jersey, which denied Calpine's appeal
    by a brief order dated May 29, 1998. Calpine thenfiled a
    timely appeal with this court, challenging both the
    Bankruptcy Court's decision on August 17, 1995 not to
    approve the proffered contract between the Debtor and
    Calpine and the court's November 27, 1996 order denying
    Calpine's motion for a break-up fee and expenses.
    II.
    At the outset, we address Appellees' contention that
    Calpine lacks standing to challenge the Bankruptcy Court's
    August 17, 1995 decision and that, therefore, that ruling is
    not before us on this appeal. Appellees reason that because
    only the debtor, O'Brien, had statutory authority to move
    for approval of the contract provisions at the August
    hearing, only O'Brien may appeal the denial of approval.
    This court has emphasized that appellate standing in
    bankruptcy cases is limited to "person[s] aggrieved."
    5
    Travelers Ins. Co. v. H.K. Porter Co., 
    45 F.3d 737
    , 741 (3d
    Cir. 1995). We consider a person to be "aggrieved" only if
    the bankruptcy court's order "diminishes their property,
    increases their burdens, or impairs their rights." General
    Motors Acceptance Corp. v. Dykes (In re Dykes), 
    10 F.3d 184
    , 187 (3d Cir. 1993). Thus, only those "whose rights or
    interests are directly and adversely affected pecuniarily" by
    an order of the bankruptcy court may bring an appeal. 
    Id. (internal quotation
    marks omitted).
    The "person aggrieved" standard, which is more stringent
    than the constitutional test for standing, serves the acute
    need to limit collateral appeals in the bankruptcy context.
    
    Id. As the
    Court of Appeals for the Ninth Circuit explained:
    This need [to limit appeals] springs from the nature of
    bankruptcy litigation which almost always involves the
    interests of persons who are not formally parties to the
    litigation. In the course of administration of the
    bankruptcy estate disputes arise in which numerous
    persons are to some degree interested. Efficient judicial
    administration requires that appellate review be limited
    to those persons whose interests are directly affected.
    Fondiller v. Robertson (In re Fondiller), 
    707 F.2d 441
    , 443
    (9th Cir. 1983).
    The question whether a party has standing to appeal in
    a bankruptcy case is generally an issue of fact for the
    district court. See In re 
    Dykes, 10 F.3d at 188
    . The
    underlying order in this case does not indicate whether the
    District Court considered Calpine's appellate standing.
    Because the facts of this case are not in dispute, however,
    it is appropriate for us to address this issue in the first
    instance.
    Courts that have considered appellate standing in the
    context of the sale or other disposition of estate assets have
    generally held that creditors have standing to appeal, but
    disappointed prospective purchasers do not. See, e.g.,
    Licensing by Paolo, Inc. v. Sinatra (In re Gucci) , 
    126 F.3d 380
    , 388 (2d Cir. 1997); see also In re Nepsco, Inc., 
    36 B.R. 25
    , 26-27 (Bankr. D. Me. 1983). We see no reason to hold
    differently in this case.
    6
    On August 17, 1995, Calpine concededly was not a
    creditor of O'Brien's estate. Nor did Calpine have a binding
    contract with O'Brien, as the sale of substantially all of a
    debtor's assets is a transaction outside of the ordinary
    course of business, which requires bankruptcy court
    approval to become effective. See 11 U.S.C.S 363(b);
    Northview Motors, Inc. v. Chrysler Motors Corp., No. 98-
    3387, 
    1999 WL 398881
    , at *4 (3d Cir. June 18, 1999). Nor
    does Calpine's appeal challenge either the "intrinsic
    fairness" of the process by which O'Brien's assets were sold
    or the good faith of NRG as the ultimate purchaser. See
    Kabro Assocs., LLC v. Colony Hill Assocs. (In re Colony Hill
    Assocs.), 
    111 F.3d 269
    , 274 (2d Cir. 1997).
    In this circumstance, we cannot conclude that the
    Bankruptcy Court's decision diminished Calpine's property,
    increased its burdens, or impaired its rights. See In re
    
    Dykes, 10 F.3d at 187
    . The only rights Calpine had on
    August 17, 1995 were the right to require O'Brien to seek
    approval by the Bankruptcy Court as per its contract and
    the right to enforce the contract if such approval was
    secured. The first right was duly exercised when O'Brien
    moved for approval at the August hearing; the second right
    never became exercisable because the condition precedent
    to its enforcement never occurred. Thus, neither of
    Calpine's rights was impaired by the Bankruptcy Court's
    decision to deny approval.
    Moreover, the order disapproving Calpine's contract
    lessened, rather than increased, Calpine's burdens: it
    relieved Calpine of any contractual duty to perform. Finally,
    Calpine's loss of the profit it hoped to gain from acquiring
    O'Brien is too speculative a harm to constitute injury to
    property for purposes of the standing test. See, e.g., In re
    Colony Hill 
    Assocs., 111 F.3d at 273
    ; Davis v. Seidler (In re
    HST Gathering Co.), 
    125 B.R. 466
    , 468 (W.D. Tex. 1991).
    We, therefore, hold that Calpine lacks standing to appeal
    the August 17, 1995 order of the Bankruptcy Court. 2
    _________________________________________________________________
    2. In light of our decision, we need not decide whether Calpine failed to
    preserve its appeal by not filing a notice of appeal from the August 17,
    1995 order.
    7
    III.
    A.
    Calpine also appeals the Bankruptcy Court's order of
    November 27, 1996 denying Calpine's subsequent motion
    for a break-up fee and expenses. The parties concede that
    it has standing on this issue. There is, nonetheless, some
    confusion concerning the legal basis on which Calpine
    made and is prosecuting that motion. Calpine originally
    captioned its motion under 11 U.S.C. S 503(b). At the
    argument before the Bankruptcy Court on June 6, 1996,
    Calpine's counsel stated: "We are not proceeding pursuant
    to 503(b)," although counsel also expressed belief that
    Calpine satisfied the requirements of that provision. App. at
    1027. In reaching its determination, the Bankruptcy Court
    stated: "Calpine . . . is not proceeding here under S 503(b)
    or the traditional administrative expense claim analysis set
    forth in S 503(b). Instead, the request is made under the
    applicable case law setting [forth] standards for approval of
    break-up fees and break-up expenses . . . ." In re O'Brien
    Environmental Energy, Inc., No. 94-26723, slip op. at 30
    (Bankr. D.N.J. Nov. 8, 1996). Calpine raises no challenge to
    this portion of the Bankruptcy Court's ruling.
    Neither Calpine nor the Bankruptcy Court have cited any
    support for the proposition that courts may create a right
    to recover from the bankruptcy estate where no such right
    exists under the Bankruptcy Code. Nor have we found any
    support for that proposition. The structure of the
    Bankruptcy Code further counsels against judicial
    expansion of the potential for recovery from the debtor's
    estate. The filing of a petition for bankruptcy protection
    under Chapter 11 of the Code creates an estate, consisting
    of all property in which the debtor holds an interest, see 11
    U.S.C. SS 301, 541, 1101, and precludes all efforts to obtain
    or distribute property of the estate other than as provided
    by the Bankruptcy Code, see 11 U.S.C. SS 362, 363, 1123.
    This statutory control over the right to recover property
    from the debtor's estate is integral to the purposes and
    goals of federal bankruptcy law. See, e.g., City of New York
    v. Quanta Resources Corp. (In re Quanta Resources Corp.),
    
    739 F.2d 912
    , 915 (3d Cir. 1984) ("The objectives of federal
    8
    bankruptcy law can be broadly stated: to provide for an
    equitable settling of creditors' accounts by usurping from
    the debtor his power to control the distribution of his
    assets.").
    Respectful of this statutory background, we decline the
    invitation to develop a general common law of break-up
    fees. We instead consider whether any provision of the
    Bankruptcy Code, as it is currently written, authorizes the
    award of break-up fees and expenses to an unsuccessful
    bidder at the plan-based sale of a debtor's assets.
    B.
    The most likely source of authority for Calpine's motion
    appears to be 11 U.S.C. S 503, the provision on which its
    motion originally relied. The parties concede that any right
    Calpine may have to recover from O'Brien's estate arose
    after O'Brien filed for bankruptcy protection and began
    marketing its assets for sale. Further, claims that arise
    after the date on which the debtor petitioned for
    bankruptcy protection ("post-petition claims") are generally
    allowed, if at all, only as administrative expenses pursuant
    to 11 U.S.C. S 503. We, therefore, treat Calpine's arguments
    as addressing whether it is entitled to receive break-up fees
    and expenses under that provision.
    Section 503 states, in relevant part:
    (a) an entity may timely file a request for payment of an
    administrative expense, or may tardily file such a
    request if permitted by the court for cause.
    (b) After notice and a hearing, there shall be allowed
    administrative expenses, . . . including --
    (1) (A) the actual, necessary costs and expense s of
    preserving the estate . . . .
    "For a claim in its entirety to be entitled tofirst priority
    under [S 503(b)(1)(A)], the debt must arise from a
    transaction with the debtor-in-possession. . . .[and] the
    consideration supporting the claimant's right to payment
    [must be] beneficial to the debtor-in-possession in the
    operation of the business." Cramer v. Mammoth Mart, Inc.,
    9
    (In re Mammoth Mart, Inc.), 
    536 F.2d 950
    , 954 (1st Cir.
    1976). The Bankruptcy Court noted: "A party seeking
    payment of costs and fees as an administrative expense
    must . . . carry the heavy burden of demonstrating that the
    costs and fees for which it seeks payment provided an
    actual benefit to the estate and that such costs and
    expenses were necessary to preserve the value of the estate
    assets." In re O'Brien, slip op. at 30.
    We assume that bidding at the sale of O'Brien's assets
    constitutes a transaction with the debtor-in-possession for
    purposes of S 503(b)(1)(A). This assumption is particularly
    appropriate here in light of the Bankruptcy Court's order of
    August 30 1995, which, by "reserving" Calpine's rights,
    suggests that the court anticipated and intended to
    preserve consideration of a later request for feesfiled by
    Calpine. Such fees could be awarded under this section
    only if Calpine's participation in the bidding process was
    necessary to accord the estate an actual benefit.
    Calpine argues that, much like in non-bankruptcy
    contexts, break-up fees should be permitted where, after
    careful scrutiny, the court determines that (1)"a debtor
    believes in its business judgment that such fees will benefit
    the estate," (2) there is no proof of self-dealing, and (3)
    there is no proof of specific harm to the bankruptcy estate.
    Appellant's Br. at 21.
    The bankruptcy courts and district courts that have
    addressed the standard for break-up fees and expenses in
    bankruptcy proceedings have adopted very different
    approaches. Some have assumed that break-up fees and
    expenses should be treated in bankruptcy the same way
    that they are treated in the corporate world, as Calpine
    contends. In In re 995 Fifth Avenue Associates, L.P., 
    96 B.R. 24
    (Bankr. S.D.N.Y. 1989), the debtor, the Creditors'
    Committee, and a potential purchaser negotiated a form
    contract that provided for the payment of $500,000 in
    break-up fees and served as the basis for an auction of the
    company. In ruling on a request to recover the fees
    following the auction, the bankruptcy court began by
    reviewing the treatment of break-up fees outside of
    bankruptcy. It stated:
    10
    In the corporate takeover context it is recognized that
    breakup fees are not illegal where they enhance rather
    than hamper the bidding. Breakup fees and other
    strategies may "be legitimately necessary to convince a
    `white knight' to enter the bidding by providing some
    form of compensation for the risks it is undertaking."
    When reasonable in relation to the bidder's efforts and
    to the magnitude of the transaction, breakup fees are
    generally permissible. But if such a fee is too large, it
    may chill the bidding to the detriment of shareholders
    (or, if the company for sale is insolvent, its creditors).
    In such instances, the fee is not protected by the
    business judgment rule (which bars judicial inquiry
    into actions of corporate directors taken in good faith
    and in the exercise of honest judgment in the lawful
    and legitimate furtherance of corporate purposes) and
    is thus subject to court review.
    
    Id. at 28
    (citations omitted). The court concluded that
    "[t]hese principles have vitality by analogy in the chapter 11
    context," and upheld payment of the break-up fees. 
    Id. (footnote omitted).
    The District Court for the Southern District of New York
    followed a similar approach in Official Committee of
    Subordinated Bondholders v. Integrated Resources, Inc., 
    147 B.R. 650
    (S.D.N.Y. 1992). There, the debtor moved for
    authorization under S 363 to enter into a letter agreement
    with a prospective lender. Under the contract, the lender
    would agree to fund the debtor's plan of reorganization in
    return for assurances that it would receive reimbursement
    of its expenses and a break-up fee should the transaction
    not go forward. Although the Subordinated Bondholders'
    Committee objected to the reimbursement and break-up fee
    provisions, the bankruptcy court approved the lender's
    proposal, deferring to the debtor's business judgment. On
    appeal, the district court identified three questions that a
    court should ask in deciding whether to approve break-up
    fee provisions: "(1) is the relationship of the parties who
    negotiated the break-up fee tainted by self-dealing or
    manipulation; (2) does the fee hamper, rather than
    encourage bidding; [and] (3) is the amount of the fee
    unreasonable relative to the proposed purchase price?" 
    Id. 11 at
    657. Because it found that the bankruptcy court had
    properly answered each of these questions in the negative,
    the district court affirmed.
    Other courts have authorized more searching review,
    identifying numerous factors that a court should consider
    in determining whether a break-up fee is permissible in the
    context of any particular bankruptcy. In In re Hupp
    Industries, Inc., 
    140 B.R. 191
    (Bankr. N.D. Ohio 1992), the
    debtor sought authorization to enter into a letter of intent
    that would have provided for the sale of many of the
    debtor's assets under 11 U.S.C. S 363 and obligated the
    debtor to pay up to $150,000 in break-up fees and
    expenses if the deal were not consummated. The Creditors'
    Committee and a principal secured creditor objected. The
    court identified seven "[s]ignificant factors to be considered
    in determining the propriety of allowing break-up fee
    provisions" in the context of "a major preconfirmation
    transaction":
    (1) Whether the fee requested correlates with a
    maximization of value to the debtor's estate;
    (2) Whether the underlying negotiated agreement is an
    arms-length transaction between the debtor's estate
    and the negotiating acquirer;
    (3) Whether the principal secured creditors and th e
    official creditors committee are supportive of the
    concession;
    (4) Whether the subject break-up fee constitutes a     fair
    and reasonable percentage of the proposed purchase
    price;
    (5) Whether the dollar amount of the break-up fee is so
    substantial that it provides a "chilling effect" on other
    potential bidders;
    (6) The existence of available safeguards beneficial to
    the debtor's estate;
    (7) Whether there exists a substantial adverse imp act
    upon unsecured creditors, where such creditors are in
    opposition to the break-up fee.
    
    Id. at 193,
    194.
    12
    The court further remarked, "In the context of a
    nonbankruptcy asset sale, . . . break-up fees are
    presumptively appropriate in view of the business judgment
    rule, and thusly, seldom require judicial attention. In the
    bankruptcy context, however, the Court must be
    necessarily wary of any potential detrimental effect that an
    allowance of such a fee would visit upon the debtor's
    estate." 
    Id. (citation omitted).
    After"carefully scrutiniz[ing]"
    the bidding incentives, the court concluded that they
    "would only be an unwarranted expense upon the Debtor's
    estate" and refused to approve the agreement. 
    Id. at 196.
    Finally, in In re America West Airlines, Inc., 
    166 B.R. 908
    (Bankr. D. Ariz. 1994), the debtor sought approval of an
    interim procedures agreement that would have provided for
    payment of between four and eight million dollars in break-
    up fees. The debtor, the Creditor's Committee, the Equity
    Committee, and the debtor's prospective contract partner
    all supported authorization of the agreement. The court,
    however, refused to apply the business judgment rule,
    which it recognized had been applied outside of the
    bankruptcy context, stating: "Acquisition of an ongoing
    business which is in bankruptcy is fundamentally different
    from that of an acquisition involving parties not in
    bankruptcy." 
    Id. at 911.
    It held:
    [T]he standard is not whether a break-up fee is within
    the business judgment of the debtor, but whether the
    transaction will "further the diverse interests of the
    debtor, creditors and equity holders, alike." The
    proposed break-up fee must be carefully scrutinized to
    insure that the Debtor's estate is not unduly burdened
    and that the relative rights of the parties in interest are
    protected. The analysis conducted by the Court must
    therefore include a determination that all aspects of
    the transaction are in the best interests of all
    concerned.
    
    Id. at 912.
    The court noted that the debtor had been "thoroughly
    marketed" and concluded that "the proposed break-up fee
    w[ould] not induce further bidding or bidding generally" but
    would "unnecessarily chill[ ] bidding and potentially
    13
    deplete[ ] assets that c[ould] be better utilized to help fund
    a plan of reorganization and continue to provide funds for
    professionals, attorneys, accountants and consultants to
    that end." 
    Id. at 913.
    It held, "No funds of the estate should
    be used to pay break-up fees in a transaction that .. .
    would appear to yield a large profit to the top bidder." 
    Id. We have
    reviewed these cases and considered the
    different approaches they represent. None, however, offers
    a compelling justification for treating an application for
    break-up fees and expenses under S 503(b) differently from
    other applications for administrative expenses under the
    same provision. We therefore conclude that the
    determination whether break-up fees or expenses are
    allowable under S 503(b) must be made in reference to
    general administrative expense jurisprudence. In other
    words, the allowability of break-up fees, like that of other
    administrative expenses, depends upon the requesting
    party's ability to show that the fees were actually necessary
    to preserve the value of the estate. Therefore, we conclude
    that the business judgment rule should not be applied as
    such in the bankruptcy context. Nonetheless, the
    considerations that underlie the debtor's judgment may be
    relevant to the Bankruptcy Court's determination on a
    request for break-up fees and expenses.
    C.
    All parties recognize that break-up fees and expenses are
    accepted in corporate merger and acquisitions transactions.
    In summarizing the corporate use of break-up fees, Calpine
    has explained that such provisions are designed to provide
    a prospective acquirer with some assurance that it will be
    compensated for the time and expense it has spent in
    putting together its offer if the transaction is not completed
    for some reason, usually because another buyer appears
    with a higher offer. Such provisions may also encourage a
    prospective bidder to do the due diligence that is the
    prerequisite to any bid by assuring the prospective bidder
    that it will receive compensation for that undertaking if it is
    unsuccessful.
    Not all of the purposes that break-up fees serve in
    corporate transactions are permissible in bankruptcy.
    14
    Although the assurance of a break-up fee may serve to
    induce an initial bid (a permissible purpose), it may also
    serve to advantage a favored purchaser over other bidders
    by increasing the cost of the acquisition to the other
    bidders (an impermissible purpose).
    Moreover, even if the purpose for the break-up fee is not
    impermissible, the break-up fee may not be needed to
    effectuate that purpose. For example, in some cases a
    potential purchaser will bid whether or not break-up fees
    are offered. This can be expected to occur whenever a
    potential purchaser determines that the cost of acquiring
    the debtor, including the cost of making the bid, is less
    than the estimated value the purchaser expects to gain
    from acquiring the company. In such cases, the award of a
    break-up fee cannot be characterized as necessary to
    preserve the value of the estate. See generally , Bruce A.
    Markell, The Case Against Breakup Fees in Bankruptcy, 66
    Am. Bankr. L.J. 349, 359 (1992).
    D.
    The Bankruptcy Court identified at least nine factors that
    it viewed as relevant in deciding whether to award Calpine
    a break-up fee and expenses, which we summarize as
    follows: (1) is the relationship of the parties who negotiated
    the break-up fee tainted by self-dealing or manipulation; (2)
    does the fee hamper, rather than encourage bidding; (3) is
    the amount of the fee unreasonable relative to the proposed
    purchase price; (4) did the unsuccessful bidder (Calpine)
    place the estate property in a sales configuration mode to
    attract other bidders to the auction; (5) did the request for
    a break-up fee serve to attract or retain a potentially
    successful bid, establish a bid standard or minimum for
    other bidders, or attract additional bidders; (6) does the fee
    requested correlate with a maximization of value to the
    Debtor's estate; (7) are the principal secured creditors and
    the official creditors committee supportive of the
    concession; (8) were safeguards beneficial to the debtor's
    estate available; and (9) was there a substantial adverse
    impact on unsecured creditors, where such creditors are in
    opposition to the break-up fee?
    15
    After weighing these various factors, the Bankruptcy
    Court concluded that Calpine had not met the
    requirements to recover break-up fees or expenses.
    Although the court found no evidence of self-dealing and
    concluded that "the requested break-up fee and break-up
    expenses [were] within the range of fees approved by some
    courts," it put most emphasis on its belief that approving
    Calpine's request for a break-up fee at the August 17, 1999
    hearing would have "chill[ed] or at best certainly
    complicate[d] the competitive bidding process." In re
    O'Brien, slip op. at 39. The court further found that the
    Debtor, not Calpine or NRG, did the work of putting O'Brien
    into a sales configuration mode (the fourth factor), and
    noted that even before Calpine had emerged as a serious
    bidder, O'Brien solicited bids from numerous companies
    and pursued serious negotiations with at least five of them.
    The court rejected any contention that the break-up fee
    provisions had attracted or retained a potentially successful
    bid, established a bid standard or minimum for other
    bidders, or attracted additional bidders (the fifth factor).
    The court noted that although it had originally been
    suggested by the Debtor that the break-up fee was needed
    to attract Calpine's bid, Calpine eventually decided to
    reenter the bidding after approval for that fee had been
    denied. Moreover, the court noted that the Calpine and
    NRG bids changed substantially over the bidding process,
    suggesting that Calpine's initial bid did not serve as a
    standard for other bidders.
    Ultimately, "the Court [could] draw no correlation
    between the request for break-up fees and break-up
    expenses and the value ultimately brought to the estate by
    the competitive bidding process" (the sixth factor). 
    Id. at 40.
    It did recognize that permitting Calpine to recover the fee
    and expenses would not injure unsecured creditors (the
    ninth factor) who will be paid in full in any event. It found,
    however, that awarding the fee and expenses would"have
    an adverse effect of holders of old equity of O'Brien by the
    dilution of at least a portion of the value that th[e] Court
    determined was provided to them pursuant to the
    successful NRG bid." 
    Id. at 42.
    16
    E.
    Rather than adopting the specific factors the Bankruptcy
    Court identified as the appropriate test to be used for all
    break-up fee determinations, we consider whether the
    record evidence supports the Bankruptcy Court's implicit
    conclusion that awarding Calpine break-up fees was not
    necessary to preserve the value of O'Brien's estate. As we
    have explained, that inquiry stems directly from
    S 503(b)(1)(A), which requires that an expense provide some
    benefit to the debtor's estate.
    As we have recognized, such a benefit could be found if
    assurance of a break-up fee promoted more competitive
    bidding, such as by inducing a bid that otherwise would
    not have been made and without which bidding would have
    been limited. Calpine argues that the fee and expenses were
    necessary to retain its bid and contends that it was
    improper for the Bankruptcy Court to draw a contrary
    conclusion from Calpine's decision to return to the bidding.
    We recognize that Calpine's decision to return to the
    bidding may have been influenced by the Bankruptcy
    Court's expressed willingness to reserve the question of fees
    for later determination. Nonetheless, when Calpine decided
    to reenter the bidding, it knew that it risked not receiving
    any break-up fees or expenses. Its decision to proceed in
    the face of this risk undercuts its current contention that
    it viewed the fees and expenses as necessary to make its
    continued involvement worthwhile. Indeed, the fact that
    O'Brien turned out to be worth at least $52 million more
    than Calpine's original bid (judging from what NRG was
    ultimately willing to pay) strongly suggests that it was the
    prospect of purchasing O'Brien cheaply, rather than the
    prospect of break-up fees or expenses, that lured Calpine
    back into the bidding.
    Calpine also contends that its bid promoted competitive
    bidding by serving as a minimum or floor bid. Calpine's
    offer for the debtor's assets encompassed in the July 1995
    agreement with the debtor was effectively the first bid, and
    by definition, the lowest, at least for that moment. The
    Bankruptcy Court, however, was not satisfied with the
    mere showing that later bids exceeded Calpine's initial one.
    Rather, the court required some showing that Calpine's bid
    17
    served as a catalyst to higher bids. We agree that this was
    a relevant inquiry and conclude that Calpine failed to make
    any such showing.
    Arguably, if the availability of break-up fees and expenses
    were to induce a bidder to research the value of the debtor
    and convert that value to a dollar figure on which other
    bidders can rely, the bidder may have provided a benefit to
    the estate by increasing the likelihood that the price at
    which the debtor is sold will reflect its true worth. Calpine
    argues that it performed this research function and that the
    fee and expenses were necessary to induce it to do so.
    Calpine's argument ignores the fact that much of the
    information bidders needed to evaluate O'Brien was
    gathered by O'Brien itself at its own expense. Moreover, the
    record in this case suggests that Calpine had strong
    financial incentives to undertake the cost of submitting a
    bid, including the cost of researching the company's worth,
    even in the absence of any promise of reimbursement. We
    cannot conclude on this record that it was error for the
    Bankruptcy Court to find that the break-up fees and
    expenses were not necessary to induce Calpine's bid.
    Finally, Calpine argues that the presence of competitive
    bidding during the O'Brien asset sale necessarily proves
    that the break-up fee and expense provisions did not chill
    the bidding, as the Bankruptcy Court feared. This is a
    logical fallacy. While it is true that bidding remained
    competitive in the face of uncertainty over whether such
    fees would be awarded, the bidding might have been even
    more heated had the court definitively ruled that Calpine
    was not entitled to a break-up fee or expenses earlier in the
    process. The results of the bidding therefore do not prove
    what effect the break-up fee and expense provisions had on
    other bidders' behavior. We note in this regard that NRG
    claims that its winning bid was no more than $1,000,000
    higher than Calpine's final offer. See Appellees
    Cogeneration Corp. and Wexford's Br. at 21. If this claim is
    accurate, then the award of $4,250,000 in break-up fees
    and expenses certainly would have chilled the bidding by
    making NRG's bid, which otherwise would have been the
    winning bid, uneconomical.
    18
    The record thus adequately supports the conclusion that
    awarding break-up fees and expenses to Calpine was not
    actually necessary to preserve the value of O'Brien's estate,
    and because this is the dispositive inquiry in a bankruptcy
    case, we find no error or abuse of discretion by the
    Bankruptcy Court.
    IV.
    For the reasons set forth, we will affirm the order of the
    District Court denying Calpine's appeal from that decision.
    A True Copy:
    Teste:
    Clerk of the United States Court of Appeals
    for the Third Circuit
    19